2449: Unlocking the Ditch: The Future of Housing Inventory and Rates with Michael Zuber

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The housing market currently is in an unhealthy spot. How do I know that? Well, first and foremost, new home sales or new new home prices are below existing. Yes, folks, don't check now, but the median home price of a new home is roughly $20,000 less than an existing home. That is not normal. That just shows you how much stress is in the system. It also shows you that mom and dad aren't stressed making the mortgage payments. Existing homes are not distressed. We do not have a wave of foreclosures, short sales, et cetera. What I want to do here is have a conversation with Jason Hartman about how do we get out of the ditch? Ever since Jerome Powell said in Jackson Hole, pain is coming, mortgage rates have shot higher. Housing transactions are down 40%. How the heck do we get out of this? Not to mention we have what appears to be a reacceleration or fighting with Iran, which has already taken mortgage rates higher. Jason Hartman, how do we get out of the ditch? Housing is in a ditch. This is the third year in a row, the second spring selling season we haven't had. Last year was tariffs. This year is war. The people in the housing industry are frustrated. They are struggling. How do we get out of the ditch?

Michael, you called it. This is a very unusual housing market because most of the time when you have super low affordability, people struggling to get in the market, you're going to have a price decline. And we only have a volume decline. So it's very interesting. Normally when volume is down like this, you'd see downward pressure on prices. But, you know, when you say the housing market is unhealthy, it's really important to unpack that because I agree with you, it is a very unhealthy market in the sense that there's just not enough inventory, and we need to see more inventory and more volume and more vibrancy. You know, economists talk about something called the velocity of money, and velocity of money typically creates an inflationary type of market because there are more transactions and everybody tries to make their cut when there's more transactions. And I'm not referring to real estate per se, I'm referring to widgets, you know, the economy in general, right? And so when you have that higher velocity, which equates loosely to volume, okay, then you have inflationary pressure. But we have inflationary pressure just because supply is so constrained and the people controlling the housing stock won't sell it. They just have these low COVID-era mortgages they don't want to give up, and you can certainly understand their position. So We're not going to see more volume until we see lower rates. Now the lower rates play in multiple ways. You know, most people think, okay, well, that'll just make housing more affordable and it will for a very brief time. Okay, like when the lower rates first happen, people will jump into the market and that will be the most affordable deal. And then those rates, if they stay low persistently, so many people jump into the market that they push prices up and there are bidding wars if it, if it gets really bad. But the other thing the low rates do is they reduce the delta between the current rate and the COVID-era rate most people already have. And when you reduce that delta, some of those people peel off and they say, okay, well, you know, listen, I know we're giving up our 3% mortgage and that's bad, but we really want to move. We've been waiting for years, and, you know, our family is growing, we got an opportunity in another geographic location, our family has shrunk, we're an empty nester, you know, we want to move down, and the constriction on inventory will ease with lower rates. So it's, it's kind of weird. That's a very unusual scenario. Okay, usually that is not the way it plays out. And usually what we have now and for the past 3 years is not the way things play out either. So it's a very unusual type of market. It really is. And this is why so many of the forecasters and prognosticators and the doomers and gloomers and Crash Bros have just been wrong, wrong, wrong, because lack of inventory.

Yeah, really, for me It's lack of inventory, but it's a tweak on that which got most people wrong. It's motivated sellers.

Yeah, right.

Desperate sellers. That's what's missing from this inventory. Because when you have must-sell, that means you're going to get transactions. When you have people comfortable.

Yep.

And they're like, hey, if I get my price, great. If not, I'll take it off the market.

Exactly. Delisting. That's the listing phenomenon.

Yeah, yeah. Expired listings, right? They're going to run 6 months, never have a an offer and just take it off, right?

Because— and they, and they don't care. Normally that person— Michael, you nailed it again— normally that person, that seller, would say, oh my gosh, I got to keep lowering the price because I'm not getting any bids, right? Or I'm not getting an acceptable offer, so I got to cut the price. Now they're saying, I'm just kind of indifferent, you know? They're just kind of apathetic about the whole thing.

It's like, they're like, life is good, I'll stay here another year.

Yeah, I got this low rate mortgage, I don't want to give it up anyway. Maybe that's for the best.

Yeah. So the question I have had, and I haven't pontificated about this in well over a year, so this is a fun conversation. What's the magic rate? Because I agree with you, the longer time goes by, the more pressure builds on these would-be sellers and the less interested they are in keeping their 3% mortgage. Yeah, right. Because it's one thing to say, hey, we just had a baby, right? Babies take up this much space.

Yeah.

But eventually that baby becomes a toddler, right? Then they become a, you know, kind garden, right? They just, they just grow and they need more stuff. So while you may be comfortable having a crib in, in, you know, mom and dad's bedroom when they're born, you're probably not going to want to do that when they're 4 or 5.

Exactly.

As time goes by, the, the goodness of the low rate will, will go away. But my question is to you, if you were had to just completely guess, no scientific answer to this, because I don't know there is a right answer, what's the magic interest rate to peel off more supply and get people to go, okay, I'm ready to move?

You know, that is the $64,000 question, or the million-dollar question, or they adjusted for inflation, the $3 million question. I don't know, whatever.

That's good. That, that was good.

That was good. It's definitely not the $64,000 question anymore. That was from an old game show, by the way. That's the reference for those who don't know. But yeah, it's a great question, and I have thought this number was the right number for many years, and then I actually saw John Burns Real Estate Consulting back me up on it. They had the same number in mind, okay, 5.5% on a 30-year fixed rate mortgage.

I think it's 5.5.

They, they actually call that the magic rate, okay? And why is that the magic rate? Well, look, 65% of the country, give or take, has a mortgage at or below 4%, okay? So if they can get a mortgage for 5.5%, and they can get what they want, chase a new job opportunity or business opportunity in a different city, you know, move to a bigger or smaller home. I mean, speaking of the bigger or smaller home, it's common for people to think of, hey, I want to move up and get a bigger home because I need more space. And also the remote work phenomenon, not just having a kid, right? Remote work, right? You know, we need, we need two offices in the home, not one. Right, you know, if both people work remotely.

Yep.

But the empty nester that won't sell their big home, they're just in a house that— look, being an economist, here's the thing you study. This is the study of economics in a nutshell: the allocation of scarce resources. That's what economics is, basically. How do we allocate those scarce resources? And the allocation is not working very well in this dysfunctional market. Correct, because we've got empty nesters or divorcees sitting in 5-bedroom, 3,200-square-foot homes that they raise their kids in.

Yeah, they probably haven't been in some of the rooms in years.

Yeah, they don't even want to live there. Okay, they want to live in a smaller house. They would prefer that, but I can't because it's more expensive. Yeah, it's more expensive to move down. That's so weird.

That's—

that's not the way it should be.

Yeah, 5.5 is really an interesting number because I agree with you, the longer this So the longer this goes, the higher that, that magic number gets, you know, as of today. And again, I'll put a date on it, July 20th, 2026, the day we're recording this. I'm honestly not sure it's that high yet. It will certainly get there and it may get there as soon as next year because again, that pressure just builds over time. I will certainly say if it got to 499, game on.

Oh, wow.

Yeah, you get it. You get a 4-handle back on a more— and again, I don't know that we will. I don't know that we'll see a 4-handle. Right?

That would be a flood. I mean, a flood of people. You know, Michael, you've referred often to that post I made on Instagram a while back of the people that can afford— you know, the number of millions of people who can afford at different rates, right? That is very telling. It just shows you how much pent-up demand there is in the market, how many people want to move. I put that number at about 6 million people. That's the would-have-been transactors over the last 3 years, correct?

But there were 2 million short a year.

Yeah, yeah, yeah. They— that's 6 million people that just are waiting, right? Yeah, you know that because that's what we're down. So think about it, if you owned a shoe store and nobody could afford to buy any shoes for 3 years, when suddenly shoes become more affordable, people would rush in and buy them. They've been waiting, their shoes are worn out, right? They want some new shoes. Same idea here.

Yeah. So again, I think we both agree that rates have to go down. I think I checked rates this morning. They're like 6.6. So at least a point lower, if not a point and a half lower. Again, we are both completely guessing. But, you know, given where we are, again, July 20th, we have this skirmish with Iran picking up. We got 9 days of bombing. You know, we have higher rates, potentially higher oil inflation. We even have some Fed presidents like Fed President Hammock saying we may have to raise rates. So doesn't look like we're getting much lower rates the rest of the year.

That is a bummer. That is a real bummer.

That is a true statement and a bummer. Both can be true.

Yeah, it really is. And who knows, you know, I still subscribe to the theory that it's not just about rates. It's not a theory, okay, but it's a fact. It's not just about rates, it's about mortgage credit availability. There's an index on that published by the Mortgage Bankers Association. It's called the MCAI. The Mortgage Credit Availability Index. And the Fed is doing things to increase availability of mortgages, and that's why mortgage spreads between the 10-year Treasury and the 30-year fixed-rate mortgage are quite low now.

Yeah, well, they're back to historical norms.

Yeah, yeah, right, right, compared to what they were. And that says that the money supply is bigger even though they're holding tight to the rates.

Yeah, but again, this is, this is why this is why mom and dad being scared or nervous or higher rates, that just tempers demand, right? If you've got mom and dad, A, comfortable where they're living and higher rates and like, hey, we'll just, we'll just stay put. We don't know what's going on with the war. We don't know what's going on with AI. That just means the rest of 2026, the housing market's going to stay broken.

Yeah, it's going to stay at lower unless we see some loosening of the money and or the rates around the midterms, which I would think they want to do, right?

Yeah, I would say— I think that would be a want, but I don't know that they're going to get that opportunity. Even— but even if they did, that's not going to impact the rest of the year. The rest of the year is over at this point. That'll be next year. That'll be Q1 help.

Well, no, I mean, I think some people would move into the market and transact if rates were better in November. Uh, oh sure, yeah, yeah. I mean, it won't be the spring selling season type crowd, you know. It won't be the— it won't be the people who are mindful of school district changes as much. But certainly investors and, you know, other people, single people, families, you know, without kids or concern about school districts.

I just, I just look at the timeline, you know, November, Thanksgiving holidays. Sure, pending home sales may go up, but actual closings, you know, we're going to see a disproportion of that land in January.

We shall see.

There you go. Well, hey, you just pulled up a chart I see in another window. You want me to pull that up?

Yeah, if you want to. Sure. This is the chart that I know you really like this chart, Michael, and I like it too. Basically, we've talked about it before. You saw it on my Instagram maybe 2 years ago, and this is just a study of how many people can afford to buy based on the median home price. Now, the median home price when we did this survey was only $392,000. It's a little higher than that now, depends if you're talking new or resale. You know, this is existing homes. And by the way, I didn't comment on what you started with, Michael, that was really good about how new homes are a better deal than resale homes. That's another super unusual thing, right?

Means the housing market's broken. That's what that means.

That— yeah, that never happens, okay? It's just weird. And when I say never, it's a figure of speech, okay? So don't, don't go and find me the one year where it did happen, okay? You know, you get the idea.

Not supposed to happen.

Yes, it's just a weird thing, okay? And so we have that, but But based on the median price now that is, you know, in the low $400s, this is how many people can afford to buy because the incomes have been creeping up. So that's good. And they've actually been outpacing home price increases. So that's really good.

15 months in a row.

Yeah, yeah, their gap is closing. That's, that's good. So at a baseline of 7%, 55.1 million people can afford the median price home at a mortgage rate of 6.5. 57.9, that's 2.8 million additional buyers can qualify. And then at 6%, 5.4 million. At 5.5, maybe that's the magic number, could— might be 7.7 million.

And last time I checked, Jason, we got what, 1.1 million homes available, something like that?

Yeah, yeah, just under 1 million, I think. Now, yeah, yeah, yeah. So inventory has been creeping up a bit, but it's still low historically. And adjusted for population, very low.

Yeah, definitely. When you adjust for population. Yeah. So we both agree there is a lot of pent-up demand. The interesting thing about that chart is that focused on the buyers, I think it misses what will be the biggest jump in transactions, and that's who's been nonexistent, and that's the move-up buyer.

In other words, the non-seller, because they need to sell a home first to move up to another one, right?

Well, I think they are a seller, right? The move-up buyer is a seller and a buyer, which means 2 transactions. Right, right. The chart there was very much buyer-oriented, buyer affordability, which is all valid and all true. What I'm trying to say, it's even better than that because what we need to unlock is the mom and dad who had the kids with the crib in the bedroom to go get that bigger house. That's why $499,000. And if that happens, not, you know, on your chart, it was over $9 million. It could be $15 million, but, you know, 6 of that will be— there will be sellers first and buyers second.

I think, Michael, that is a very good point. However, I think this time it will be a little bit different, and here's why. A lot of those first-time buyers who are sitting in the first-time home that they bought that want to move up, right, they are more likely than ever before in history to keep that home as a rental because they've got that super cheap mortgage on it. And they call them accidental landlords, but that wouldn't really be an accidental landlord. That would just be a prudent landlord that would keep their house because the mortgage rate is so good that they won't even put it on the market.

You know, again, I think all— I think so. I think what you just said is factually correct. It has never been a— it'll probably never be more frequent I don't think when you look at the raw number, it is that frequent. But and also, I think it would be a financial windfall. I just think the average consumer is broke and the average consumer needs that equity and needs to move in because they can't save for a down payment. It could double. Yeah, right.

So, you know, you're definitely right. I mean, some of them certainly need the cash out of their home, but remember, they can do a HELOC, they can do a home equity agreement.

The average buyer is not very sophisticated. I talk about mom and dad. Come on.

Yeah, I'm just saying more than before.

Oh, totally agree. I'll even go 100% more. But the base number is small.

Yeah, right. Yeah. So even if— so in other words, you're saying even if you double the base number of the people who would keep their property as a fart in the wind, it's still a small number. Yeah. No big disagreement. Yeah.

Again, I think, I think the housing market's been broken since Jackson Hole. I think it stays broken through '26. I will say you brought up something that I'm trying to hammer on and that is affordability is getting better. We've had 15 months in a row of wages increasing more than home prices. If that continues and if rates just go to 6% from 6.6%, we're going to start getting dangerously close to trend because when you zoom out and you look at the trend of affordability, obviously since 2020 and 2021, we saw this huge divergence away from trend. Yeah, it's been 5 years, folks. If you look at that chart, it's like a magnet coming back to trend, and we could get there next year.

We shall see. I think you're right. We are coming back to trend, and, and the incomes are surpassing the house price appreciation. Maybe not because incomes are growing so fast, but house prices are not growing fast.

Exactly. Flat.

But they are growing. Understand, they are just close to the highest ever. About, about 2% last year. Okay, so in the past 12 months, so, you know, house prices are growing. They have been growing throughout the—

they're not down 38%, Jason. Come on. What's that? They're not down 38%. We didn't know.

Melody Wright be damned, and Nick Gurley and all the doomers, they are— they're just wrong as usual.

There you go. Thank you, buddy. Take care.

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